Governor Newsom Signs an Executive Order on State Prescription Drug Purchasing

On Monday, January 7th, asserting healthcare was a central pillar of his “California for All” agenda, newly elected Governor Gavin Newsom signed an executive order (EO) aiming to consolidate the state’s prescription drug negotiating power by fully transitioning the Medi-Cal pharmacy benefit to fee-for-service (i.e., carving-out pharmacy services from managed care) and by strengthening the state’s joint purchasing program for pharmaceuticals. He also signed an EO to create California’s own Surgeon General, though further details on this position will be forthcoming.

The EO on pharmaceutical spending gives the Department of Health Care Services (DHCS) until January 2021 to transition all pharmacy services for Medi-Cal managed care to a fee-for-service benefit, carving the pharmacy benefit out of Medi-Cal managed care. The Governor’s 2019-2020 Proposed Budget Summary states the transition is “estimated to result

in hundreds of millions of dollars in annual savings starting in fiscal year 2021-22” – with the savings chiefly coming from additional supplemental rebates to the state as a result of a broader preferred drug list (PDL) and from what the Governor’s Office states would be a broader patient population.

Critics, however, have pointed out that managed care organizations (MCO) providing care to a substantial portion of the Medi-Cal population, such as Anthem Blue Cross (40 million covered lives) and Kaiser Permanente (nearly 12 million covered lives), are already leveraging comparable numbers of covered lives to Medi-Cal (13.1 million beneficiaries) in their negotiations for greater discounts and rebates on pharmaceuticals. Furthermore, these MCOs generally have greater flexibility to restrict formularies and to impose more rigid utilization management controls (e.g., prior authorization and step therapy), as well as the ability to more closely coordinate the MCO’s administration of the pharmacy benefit with that of the medical benefit.

The other major component of the EO, strengthening the Statewide Pharmaceutical Program (SPP), has also received criticism, as such efforts have been consistently pushed since 2002 and have failed largely due to internal Administration concerns. The Department of State Hospitals, the Department of Corrections and Rehabilitation, the Department of Youth Authority, and the Department of Developmental Services are the only agencies statutorily required to participate in the SPP. Currently, pharmaceuticals for the California Public Employees’ Retirement System (CalPERS) and Medi-Cal are not acquired through the SPP due to fundamental differences in the agencies’ needs, such as how patients obtain the medicines (e.g., within a state-owned facility or from a private pharmacy in the community).

The EO further requires the Department of General Services (DGS) to develop a means by which private purchasers in California to participate in the state’s bulk pharmaceutical purchasing agreements. It is unclear how the state could achieve such broad contractual flexibility without compromising other terms of the contracts. DGS is required to provide a report on this to the Governor’s Office by May 17, 2019.

Reports to the Governor’s Office are required for other provisions of the EO. The Department of Health Care Services (DHCS) must provide a report on the Medi-Cal transition to a fee-for-service pharmacy benefit by July 12, 2019. In addition to the private purchaser report mentioned above, DGS must also provide a report on the pharmaceuticals to be prioritized for bulk purchasing by March 15, 2019 – with a follow-up report on how it will develop and implement purchasing arrangements for those pharmaceuticals, as well as invite participation from local governments, by April 12, 2019.